Chinese and South Korean support for shipbuilders irks Japan

Japanese shipyards, such as this Kawasaki Heavy Industries site, face intense competition from South Korean and Chinese rivals that receive state support. (Photo by Kenji Asada)

TOKYO -- Japan is growing frustrated by government assistance in China and South Korea to their ailing shipbuilding industries, with Prime Minister Shinzo Abe even broaching the issue with his counterparts at a trilateral summit earlier this month. But it is unlikely that Seoul and Beijing will do much to address Tokyo's concerns.

"We want to discuss removing measures that are effectively warping the market, and this is not just for steel but also for shipbuilding," Abe said after meeting with Chinese Premier Li Keqiang and South Korean President Moon Jae-in at the May 9 summit in the Japanese capital, expressing concern about overcapacity. He also said he may raise the issue as part of the main agenda at the G-20 summit in Japan next year.

Japan, which feels itself at a disadvantage on costs, is criticizing Beijing and Seoul for public-sector assistance to their flagging shipyards, which Tokyo asserts is causing an overcapacity and supply glut in those countries. From their perspective, however, China and South Korea are loath to let shipbuilders sail into choppy waters because they employ big workforces.

The shipbuilding industry has been treading water for a while. South Korea's Daewoo Shipbuilding & Marine Engineering, the world's second-largest player, suffered deep losses in 2015. China State Shipbuilding, one of the country's two leading state-run shipbuilders, known as CSSC, remains in the red, and shipbuilding operations of heavy machinery manufacturers in Japan are also suffering.

Given that a single shipyard employs several thousand workers, governments are usually hesitant to reorganize them for fear of leaving so many people out of work at once. China and South Korea have even gone a step further, recommending the use of vessels built domestically and injecting public funds into shipyards that went bust. Abe's remarks indicate his frustration at the lack of normalcy in their industries, where shipyards that are no longer competitive are allowed to hang around.

The shipbuilding industry in Japan underwent explosive growth during the country's postwar economic expansion. The industry swallowed up half the world's vessel orders in the 1990s. But Japanese groups' market share had plunged below 10% in 2017. Meanwhile, South Korean peers have made a series of large investments, with industry leader Hyundai Heavy Industries boasting 10 docks at its flagship yard. They are also consistently superior on price, leading to the perception that South Korean vessels are always 20% cheaper than Japanese-made ships. They have improved their technology in recent years as well. Chinese state-run players are also placing severe price pressure on their South Korean rivals.

Such competition has led to a global supply glut. Ship orders surged from around 40 million gross tons in the 1990s to 130 million gross tons in 2006. But after the global financial crisis, demand for marine shipping plummeted, depressing vessel prices. Today new ships with a capacity of 20,000 tons to 30,000 tons fetch only $20 million a vessel, half the price tag seen back around 2008.

"Unless we do something, the ailing industry will get even worse," said Yasuhiko Katoh, chairman of the Shipbuilders' Association of Japan, who took the unusual step in March of sending a letter of complaint to a trade group in South Korea. The recent move by Seoul to relax the standards for guaranteeing the advances domestic shipyards receive from maritime shippers pushes a level playing field farther away, Katoh said in the missive.

The Japanese government is reaching out to South Korea and China in addressing the issue, with officials at high-level talks between Tokyo and Beijing last month urging all parties to engage in discussion toward resolving the glut. However, the efforts apparently failed to yield the intended outcome, with the joint statement that came out of trilateral talks between the three nations adding language that simply said the countries recognize an overcapacity in the industry is having an adverse impact.

The South Korean recipient of the missive from Japan has not shown any particular reaction, either. Given that South Korea and China have far more workers in the shipbuilding industry than Japan does, it is unlikely that Seoul and Beijing will adjust their supply capacity.

Japan's shipbuilders are trying to do what they can to tackle the issue, with Mitsui E&S Shipbuilding and Tsuneishi Shipbuilding tying up in overseas work and others moving shipyards abroad. Some are also calling for the filing of a complaint against South Korea with the World Trade Organization.